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May 05, 2005

The Global Gloom Spreads To Australia

Yesterday the Bank of Australia declined to adjust its key monetary policy rate -- duly reported, among other things at The Skeptical Spectator -- and the Financial Times marked the occasion with a look at the economic situation Down Under.

After the longest expansion in its history, is the Australian economic miracle over? The country breezed through the Asian financial crisis, the collapse of the global technology bubble and even weathered a drought that has cut farm output by a third. But, after a charmed 14-year run, output growth abruptly slowed to 1.5 per cent last year and neared zero in the fourth quarter.

The current account deficit meanwhile has reached a 40-year high of 6.4 per cent of gross domestic product. House price growth, after more than doubling in the six years to 2004, tumbled through last year and in some areas, actually fell. Bothered by the prospect of rising inflation, the Reserve Bank of Australia increased the cash rate in March and may raise it again.

Well, not yesterday, but we get the point.  The article seems to provide some support for those awaiting a housing-price collapse -- and the collateral damage -- elsewhere:

As one of the most successful economies in the Organisation for Economic Co-operation and Development, Australia's troubles also have implications for other economies. The current experience, for example, appears to vindicate those who warned that the combination of rapidly rising house prices and household borrowing might prolong an illusory expansion, but only at the price of a deeper downturn when the bubble burst.


Beneath the surface, the GDP numbers are not quite as they seem. Business investment remains strong in Australia. Home building is certainly declining, but that was not only expected but also welcomed. Household consumption is quite firm. Employment has picked up solidly. The unemployment rate is now lower than it has been for more than a quarter-century.

The unexpected weakness has been in exports. After increasing briskly over the year to June 2004, export growth stopped. The problem is not lack of demand but shortage of product. This is most apparent in metals exports, which fell in volume over 2004 despite rising prices. The house price boom has been deflated by interest rate increases, but without deflating the economy. Yet the impact on consumption has been zero. Household consumption growth last year rose to about the average of the past decade.

The prognosis?

By the end of the year growth will be faster and the current account deficit narrower...

UPDATE: On the other hand, here is this morning's news from the FT:

Australia has posted its second largest monthly trade deficit on record, reflecting the higher cost of oil imports and the impact of a potentially serious drought on its important rural sector.

According to data released on Thursday, the trade deficit in March jumped to A$2.67bn, well ahead of market expectations of a shortfall of A$2.1bn and up from a revised A$2.24bn in February.

Imports rose by 2 per cent while exports, dragged down by an 8 per cent drop in farm goods, fell 1 per cent. There were declines in shipments of beef, sugar, wheat and wool, all segments in which Australia is among the top five global exporters.

While Australia’s economy is predominantly service-based, commodity and farm goods still figure heavily in its external trade, accounting for more than half of merchandise exports.

May 5, 2005 in Australia | Permalink


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I just returned to the US last summer, after 11 years both living in and forecasting the Australian economy.

After looking at the breakdown of the December qtr GDP figures, I have to agree that this is not nearly as bad as the headline growth number suggests. Household consumption and private business investment together grew 1.3 percent for the quarter, so while domestic demand has slowed over the last couple of quarters, it's still pretty strong.

There was a similar "soft patch" in 2002-03, with GDP growth well under 1 percent/qtr largely as a result of big trade deficits.

On that, I'm also not terribly concerned by the latest trade figures that the FT cites. This happened before -- the '02-03 slowdown in NX was also largely drought-driven. Australia has also been a consistent counter-example to the view that current account deficits greater than 5% of GDP are big trouble.

Having said that of course, a 5-6% CAD caused by a drought & high oil prices is a different animal (imho) to one caused by excessively loose fiscal policy. At least the conservative government in Australia still cares about balancing the budget...

Posted by: Peter Summers | May 05, 2005 at 06:26 PM

I would endorse what Peter has to say. The decline in headline growth is driven by a large subtraction from net exports, symptomatic of domestic economic strength, not weakness. Australia's experience with house price inflation has not led to the dire consequences many predicted.

Posted by: Stephen Kirchner | May 05, 2005 at 06:37 PM

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